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Portfolios, Planning and the Pursuit of Perfection

A look at how advisors can do a better job at giving clients what they really want from a financial advisor

I spend a significant amount of time talking and working with advisors of various sorts and most of them have a decent working knowledge of the retirement income literature and have a good sense of what the advantages and disadvantages of the various approaches are. In short, they generally know what ought to be done in most situations.

Yet they struggle with recalcitrant clients and prospects and how to handle them. For example, their clients and prospects resist annuitized floors. They don’t delay Social Security.

From a practical standpoint, this problem is made worse because there is almost always a competitor who is willing to say (for example) that a 7% withdrawal rate is no problem or that the prospective retirees don’t really have to work longer and wait to retire or that an assumed retirement portfolio return of 9% is no big deal.

In a more perfect world, good advisors would simply tell the truth as they understand it and leave these clients, prospects and those who take advantage of them to their own devices. And I frequently tell advisors just that. But that is asking a tremendous amount from a business standpoint, especially in the current economy. Indeed, advisors sometimes tell me that I don’t offer “real world” thinking.

The long-range answer to this type of problem ought surely to be more professional barriers to entry, more educational requirements and a better regulatory system—in short, better advisors. But unless and until that goal is brought to fruition, I have been wondering what suggestions I could offer to caring and competent advisors struggling both for business and to remain ethical in the current environment, to help with their recalcitrant clients and prospects when they face this type of situation.

So I asked for help from some of the best people I know who deal regularly with this type of problem.

Michael Kitces, financial planner and director of research for Pinnacle Advisory Group, headquartered in Columbia, Md., emphasized that too often the planner is trying to foist the planner’s desires, goals and strategies onto the clients, without really hearing and listening to the client’s concerns. We may be pushing a guaranteed income approach when the client fully understands the risks yet reasonably chooses a more probabilistic approach to providing retirement income. Therefore, we should listen more and better as a matter of routine practice.

As Mr. Kitces puts it, we “need to get out of our own heads and jargon and really listen to what clients want and to put the issues into terms and context they can understand (and if we find it doesn’t resonate with them, realize it might actually be our problem, not their problem).”

Even so, the perceived client problem is often real. Dana Anspach, founder of Sensible Money, in Scottsdale, Ariz., makes the important point that a unit of consumption today makes me far happier than a unit of consumption 20 years from now and happier still if I fear that I will not be around in 20 years to enjoy it. Thus I may not only be failing to listen carefully to clients; I may be making too much of the problem too.

That possibility was reinforced by Meir Statman, the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University, who wondered if perhaps the recalcitrant prospects have other resources unknown to the advisor. Even so, while many studies support the idea that advisors often are given less than the full picture of their financial situation by clients, portfolio failures happen often enough that I highly doubt that “other money” is routinely at the root of the problem.

However, Professor Statman and Wade Pfau, who is about to join the faculty of the American College as a professor of retirement income in its new Ph.D. program in Financial Services and Retirement Planning, both noted the possibility that investors intuitively recognize that they are (and are willing to be) pretty good at modulating their spending by circumstances as the need arises and to do so well before they run out of money.

Trying to impose or even recommend strict limits on people who already have demonstrated reasonable self-control and the ability to consider the future is difficult business. Indeed, consistent with the active listening proposed by Mr. Kitces, having substantial assets is itself good evidence that they possess such qualities and we should perhaps give more respect and credence to their views even when they disagree with our own.

Sometimes it helps simply to address the issues head-on. Mr. Kitces has had success by providing clients with materials that reveal that the competitor’s statements are false. For example, he routinely pulls out a chart he uses for safe withdrawal rate presentations and draws a line at 7% or 9% or 6% or whatever the clients say they heard), and “the number of times where the bars don’t reach the line make it crystal clear it’s a dangerous strategy.” For him, the most difficult situations are those where client greed is at the forefront of the alleged concern.

“A lot of people are desperate for return, and are willing to fool themselves regardless of facts and data to believe that the next guy really can get them 7%/10%/12% ‘guaranteed and safe’ returns.”

The greed problem highlights the issue of dealing with client emotions generally. The Wall Street Journal columnist Jason Zweig pointed me to research by Ellen Peters and Paul Slovic showing that in order to make people understand the implications of the research and supporting data, we need to give the arithmetic an emotional charge.

Thus instead of simply showing them the numerical consequences of a 7% withdrawal rate, we should “use some red ink, legends or other visual elements to load the results with aversive emotion,” as Mr. Zweig put it. Of course, he added that our own recommendations will elicit responses too and we need to be prepared to depict them as well.

As Mr. Zweig emphasized, we are all social animals. It is natural and inevitable for most people to measure their success and status against their peers, and advisors are people, too. Yet the advisor who loses business to the competitor proposing an unrealistic approach and envies him “has already lost the battle. [Warren] Buffett likes to say that companies get the shareholders they deserve. Ultimately, every advisor has to be reconciled to the perennial truth that you get the clients you deserve.”

Surely the best advisors will need to listen more carefully, to provide excellent advice and recommendations based upon the most thoughtful research, and to make their points in a way that resonates with clients both intellectually and emotionally. That’s far easier said than done, of course. Long-term financial and retirement planning is difficult business. As Ms. Anspach sagely added, “It is hard to plan for something when you don’t want it to happen.” Indeed it is.

Bob Seawright is chief investment and information officer for Madison Avenue Securities in San Diego.

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